The 'Too Big Of A Market Cap Stock' Theory

I don't know about you, but have you noticed how big-cap stocks are being priced by the market? If you haven't noticed, they are cheap. In the chart below, we see the quarterly revenues for the past decade of Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), Cisco (NASDAQ:CSCO) and Oracle (NASDAQ:ORCL). Microsoft's revenues are up about 300% since 2003, Oracle's have quadrupled, Cisco's have doubled as have Intel's.

data by YCharts

However, if we look at the market cap of these stocks (chart below), with the exception of Oracle, the others have done nothing over the past decade. Their market cap is basically the same.

data by YCharts

Also, if we look at the appreciation they have given to investors (excluding any dividends) over that decade, only Oracle has doubled in price, while the others are more or less flat. The phrase "lost decade" is an understatement.

data by YCharts

Also take note at the historic P/Es these stocks were trading for (chart below).

data by YCharts

Please note the P/E is TTM;the actual P/E today is lower and if we look at the forward P/E for each stock, all are hovering around 10.

Stock

Microsoft

Oracle

Intel

Cisco

Forward P/E

8,54

11,9

10,32

9,96

Click to enlarge

The question is, why are these stocks priced so differently by the market today than a decade ago?

In Intel's case, stockholders' equity has been increasing every year and the company has been reducing the float at the same time. On top of that, the company has about $10 billion in cash. And how does the market reward the stock? It doesn't. Like I showed in the above chart, Intel has gone nowhere for a decade.

data by YCharts

Seeing all this makes me wonder about the faith of Apple's stock. Is it possible that Apple (NASDAQ:AAPL) remains at current price levels for years and years? The company has more than $100 billion in cash and a capitalization of about $470 billion. What else does the market want in order to drive the stock to $1,000?

The answer is yes, it is possible. If we look at Cisco's balance sheet, we will see that the company has a market capitalization of $110 billion, with $45 billion on the balance sheet.

This means that Apple can continue to make money and reach a point where it has $250 billion in the bank and the stock, analogous to Cisco, might go nowhere. Please note I am not saying that this will happen to Apple, but that it is a possibility based on what I see in Cisco.

And if this is the new norm in the large cap space -- where stocks can go nowhere for years and years -- why would someone want to be invested in a large cap stock over the long term, except of course for a good dividend? Also, is long-term stock appreciation not a possibility anymore with large cap stocks?

No one can really answer that, and all we can do is to connect the dots and make assumptions, but the dots are telling us just that.

And if this theory of mine makes any sense, the question is why does it make sense? Again, the only thing we can do is to make assumptions.

And I am assuming it has to do with the fact that many of these companies have too big of a market cap to go much higher.

Think about it, Apple right now has a capitalization of about 3% of U.S. GDP. What would happen if Apple was valued at a P/E of 30? It would be valued around 10% of U.S. GDP. Is something like this possible?

So according to this new theory of mine, companies with a market cap of $1 billion can go to $10 billion (even if they don't deserve it), but companies with a market cap of $500 billion will never go much higher, no matter how much they deserve it.

Also, companies like Research In Motion (RIMM), that are miniscule in market cap compared to Apple, have the potential for extraordinary returns, but Apple -- from these levels -- doesn't.

Bottom line

Assuming this totally out of the box theory of mine makes any sense, reach for smaller cap stocks and let stocks over $50 billion in market cap (or even less) for large institutional investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.